1. The investment in project A is $ 1 million and the investment in project B is $ 2 million. Both projects have a unique internal rate of return of 20%. Is the following statement true or false? For any discount rate from 0 to 20% project B has an NPV twice as great as that of project A. Explain the answer.

2. Consider the following two mutually exclusive projects available to Global Investment, Inc.

	C0	C1	C2	Profitability Index	NPV
A	-1000	1000	500	1,32	322
B	-500	500	400	1,57	285

The appropriate discount rate for the projects is 10%. Global Investment has to chose to undertake project A. How would you explain that decision to shareholders? Why do you chose A instead of B when B has a higher profitability index. Are there any circumstances under which Global Investments should chose project B?

3. Projects A and B are mutually exclusive and have the following cash flows, calculate the internal rate of return and net present value, assuming that the appropriate interest rate is 7%, which project should be accepted?

	Cash Flows
Year	Project A	Project B
0	-2000	-1500
1	1000	500
2	1500	1000
3	2000	1750

4. Suppose the following two independent investment opportunities are available to Greenplan, Inc. The appropriate discount rate is 10%.

	Cash Flows
Year	Project C	Project D
0	-500	-2000
1	300	300
2	700	1800
3	600	1700

Compute the profitability index for each project, which project (s) should be accepted on the basis of PI rule?

5. The treasurer of Seoul Foods, Inc. has projected the cash flows for projects A, B and C as follows:

year	Project A	Project B	Project C
0	-100 000	-200 000	-100 000
1	70 000	130 000	75 000
2	70 000	130 000	60 000

Suppose the relevant discount rate is 12% a year.

1. Compute the profitability index and NPV for each project.

2. Suppose these tree projects are independent. Which project (s) should the company accept based on the profitability index rule?

3. Suppose those projects are mutually exclusive. Which project (s) should the company accept based on the profitability index rule?

4. Suppose Seoul Foods budget for these projects is 300 000. The projects are not divisible. Which project (s) should the company chose.

6. Bullock Gold Mining - mini case study

Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in the South Dakota. Dan Dority, the company's geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of the gold deposit to Alma Garrett, the company's financial officer. Alma has been asked by Seth to perform an analysis of the new mine and present her recommendation on whether the company should open the new mine. Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expense of the opening the mine and the annual operating expenses. If the company opens mine, it will cost $500 million today, and it will have a cash outflow of $80 million nine years from today in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the following table. Bullock Mining has a 12% required return on all of its gold mines.

Year	Cash Flow (000s)
0	-500 000
1	60 000
2	90 000
3	170 000
4	230 000
5	205 000
6	140 000
7	110 000
8	70 000
9	-80 000

1. Construct a spreadsheet to calculate internal rate of return, modified internal rate of return and net present value of the proposed mine. Calculate payback period - optionally.

2. Based on your analysis, should the company open the mine?

7. Suppose you are offered $ 5.000 today, but must make the following payments:

Year	Cash Flows
0	5 000
1	-2 500
2	-2 300
3	-1 000
4	-1 000

1. What is the IRR of this offer?

2. If the discount rate is 15% should you accept this offer?

3. If the discount rate is 20% should you accept this offer?

4. What is the NPV of the offer if the discount rate is 15%, 20%?

5. Are the decisions under the NPV rule consistent with those of the IRR rule?

8. Consider the following cash flows on two mutually exclusive projects for the JHP company. Both projects require annual return at 15%

Year	Deepwater fishing	New submarine ride
0	-600 000	-1 800 000
1	270 000	1 000 000
2	350 000	700 000
3	300 000	900 000

As a financial analyst for JHP you are asked the following questions,

1. If your decision rule is to accept the project with the greater IRR, which project should you chose?

2. Because you are fully aware of the IRR rule's scale problem, you calculate the incremental IRR for the cash flows, based on your computation, which project should you chose?

3. To be prudent you compute the NPV for both projects, which project should you chose? Is it consistent with the incremental IRR rule?

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